Introduction to the Taxation of Corporate Divisions
By Anthony DiosdiInternal Revenue Code Section 355 allows a corporation to make a tax-free distribution to its shareholders of stock and securities in one or more controlled subsidiaries. Corporate divisions involve the reverse- breaking the investment reflected in one corporation into investments in multiple corporations. The reasons for a corporate division or separation can be varied. A divisive transaction can be either taxable or tax-free. To illustrate a “taxable division,” imagine a corporation with two individual shareholders that has been operating a hotel business and a restaurant business as separate divisions. The corporation might arrange a corporate division simply by distributing the hotel business assets to one shareholder and the restaurant business assets to the other in a complete liquidation. Such a liquidating distribution would be taxable to the shareholders…